A Chinese man walk past a banner showing how to identify counterfeit U.S. dollars displayed outside a bank in Beijing, Wednesday, Sept. 1, 2010. The Obama administration, under U.S. congressional pressure to take a tough stance on Chinese trade policies, determined Tuesday that Beijing unfairly subsidized $514 million in aluminum products last year. (AP Photo/Andy Wong)

Serious people were appalled by Wednesday’s vote in the House of Representatives, where a huge bipartisan majority approved legislation, sponsored by Representative Sander Levin, that would potentially pave the way for sanctions against China over its currency policy. As a substantive matter, the bill was very mild; nonetheless, there were dire warnings of trade war and global economic disruption. Better, said respectable opinion, to pursue quiet diplomacy.

But serious people, who have been wrong about so many things since this crisis began — remember how budget deficits were going to lead to skyrocketing interest rates and soaring inflation? — are wrong on this issue, too. Diplomacy on China’s currency has gone nowhere, and will continue going nowhere unless backed by the threat of retaliation. The hype about trade war is unjustified — and, anyway, there are worse things than trade conflict. In a time of mass unemployment, made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on our list of worries.

Let’s step back and look at the current state of the world.

Major advanced economies are still reeling from the effects of a burst housing bubble and the financial crisis that followed. Consumer spending is depressed, and firms see no point in expanding when they aren’t selling enough to use the capacity they have. The recession may be officially over, but unemployment is extremely high and shows no sign of returning to normal levels.

The situation is quite different, however, in emerging economies. These economies have weathered the economic storm, they are fighting inflation rather than deflation, and they offer abundant investment opportunities. Naturally, capital from wealthier but depressed nations is flowing in their direction. And emerging nations could and should play an important role in helping the world economy as a whole pull out of its slump.

But China, the largest of these emerging economies, isn’t allowing this natural process to unfold. Restrictions on foreign investment limit the flow of private funds into China; meanwhile, the Chinese government is keeping the value of its currency, the renminbi, artificially low by buying huge amounts of foreign currency, in effect subsidizing its exports. And these subsidized exports are hurting employment in the rest of the world.

Chinese officials defend this policy with arguments that are both implausible and wildly inconsistent.

They deny that they are deliberately manipulating their exchange rate; I guess the tooth fairy purchased $2.4 trillion in foreign currency and put it on their pillows while they were sleeping. Anyway, say prominent Chinese figures, it doesn’t matter; the renminbi has nothing to do with China’s trade surplus. Yet this week China’s premier cried woe over the prospect of a stronger currency, declaring, “We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs.” Well, either the renminbi’s value matters, or it doesn’t — they can’t have it both ways.

Meanwhile, about diplomacy: China’s government has shown no hint of helpfulness and seems to go out of its way to flaunt its contempt for U.S. negotiators. In June, the Chinese supposedly agreed to allow their currency to move toward a market-determined rate — which, if the example of economies like Brazil is any indication, would have meant a sharp rise in the renminbi’s value. But, as of Thursday, China’s currency had risen about only 2 percent against the dollar — with most of that rise taking place in just the past few weeks, clearly in anticipation of the vote on the Levin bill.

So what will the bill accomplish? It empowers U.S. officials to impose tariffs against Chinese exports subsidized by the artificially low renminbi, but it doesn’t require these officials to take action. And judging from past experience, U.S. officials will not, in fact, take action — they’ll continue to make excuses, to tout imaginary diplomatic progress, and, in general, to confirm China’s belief that they are paper tigers.

The Levin bill is, then, a signal at best — and it’s at least as much a shot across the bow of U.S. officials as it is a signal to the Chinese. But it’s a step in the right direction.

For the truth is that U.S. policy makers have been incredibly, infuriatingly passive in the face of China’s bad behavior — especially because taking on China is one of the few policy options for tackling unemployment available to the Obama administration, given Republican obstructionism on everything else. The Levin bill probably won’t change that passivity. But it will, at least, start to build a fire under policy makers, bringing us closer to the day when, at long last, they are ready to act.

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